The FOMC decision later promises to be a significant one for markets. Risk-on positions have been reduced, and we could see more equity hedges put on in case the Fed signals it is now done for the time being. If that is the message (even if packaged in still very dovish language), there might be more profit-taking in stocks, curve steepeners, and a short-dollar position-squeeze.
Stocks are trading fairly rangy ahead of the FOMC, as most market commentators assume extraordinarily little out of the event, expecting the committee instead to hold fire till September when a secondary outbreak of COVID-19 is more likely to happen when entering the colder autumn months. But there have been few signs from the Fed of late to under-deliver when it comes to policy backstops.
US futures have traded mixed so far, with the tape having a decidedly defensive tilt, suggesting de-risking continues
At the open in Europe, banks have been in focus on reports of plans for a euro-wide "bad bank", which is sentiment positive.
Elsewhere, risk is generally trading higher, copper firmer (despite some soft China inflation data) and the dollar weaker, with oil the outlier, where WTI and Brent are trading more vulnerably, following a bigger-than-expected build in inventory data from the US.
Currency Markets
G-10
There was a bit of a consolidation yesterday across asset classes, with European stock markets down between 1-2%. However, the sell-off in the euro was short-lived and reversed quickly. In forex, today's focus is squarely on the FOMC - and hence the greenback - but taking the FOMC out of the equation, it seems the euro is being bought on dips, regardless given the positive political developments in Europe over the past few weeks, which probably makes sense.
But also helping the euro's fortunes is the strong case that is building, suggesting the coronavirus pandemic is over (at least for the summer), as economic reopening has not led to any significant spikes in case-counts. However, in the US, there is evidence that the virus continues to spread in various states. Arizona, for example, has experienced a surge in cases, and hospitals are close to capacity.
Asia FX
The USD lower story continues in Asia ahead of today's FOMC announcement, with USD/KRW 1m NDF below 1191, after breaking the 200dma of 1195, while the USD/THB touched a fresh low of 31.13 exacerbated by THB buying through the ASEAN crosses. With the crosses still at recent historical highs, it would not be a surprise to see the USD/THB test the 31-level in quick fashion. The ringgit continues to lag its ASEAN peers, due to lower oil prices after the larger-than-expected build in US crude inventories.
Gold
The gold market is finally shaking off a bit of the negativity from the US NFP report and moving higher, as the USD continues to show signs of buckling. However, investors are looking for a more consistent break of $1720/25 to confirm a more convincing uptrend that seems to be front-running ahead of the FOMC later today.
According to Nikkei, Japan is preparing a joint statement to be issued with other G7 countries that, if approved, will express concerns over the recent NPC approval of the Hong Kong security law. So, with more nations looking to denounce the HK security law openly, the uptick in geopolitical tension is adding to gold's luster.
Retail driving local ASEAN bourses
Local stock bourses in both Thailand and Malaysia are seeing enormous retail flow these days, of course, the emergence from lockdown is positive. But the decisive rally is being driven primarily by unprecedented retail inflows into cyclicals and small and mid-cap stocks. Similar to the Robin Hood phenomenon in the US, time-deposit rates have declined so much, encouraging retail investors to seek other opportunities for their savings.
According to the local industry reports, Thailand has seen BHT100bn of retail net buying in the past 90 days, 0.7% of total market cap, with similar metrics seen in Malaysia. Retail investor behavior has changed; typically, they sell into market strength to fund consumption, but today they are not selling, but buying, and Malaysia is showing similar trends.